MWC Day 1 – The time machine

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The taxonomy of MWC is changing

  • Nokia has through nostalgia has created some excitement in the mobile phone industry but elsewhere the signs of maturity are everywhere.
  • The notable fall out coming from Microsoft, Blackberry, Huawei amoung others who have substantially reduced the sizes of their stands has been replaced with:
    • First: Automakers who outside of BMW still seem to be a little unsure of what they are doing at this show.
    • They have realised that mobile holds the key to preventing them from becoming Android handsets on wheels but are very uncertain how they intend to address this problem.
    • I think that Tesla has a very good idea of what it is doing in this space and consequently does not feel that it needs to be here.
    • Second: An endless list of handset brands who are all selling almost exactly the same device where the proposition is very unclear.
    • Two exceptions are Wiko and LeEco who are at least trying to offer points of differentiation on the device even if they are having a very hard time doing so.
    • Condor from Algeria and Accent from Morocco are doing stock Android but are attempting to achieve some differentiation by focusing on their respective regions.
  • Furthermore, the app industry, largely present in Hall 8,8.1 and the hallways, has moved into a new phase of development.
  • Gone are the heady days of 2015 when it was all a out adding users at any cost.
  • Now the focus is clearly on engagement, analytics and monetization.
  • Developed markets are pretty much saturated from a user perspective meaning that how to delight those users and making sure that they stay engaged is of paramount importance.
  • Consequently, the suit count in Hall 8.1 has gone up substantially as has the size of the average stand.
  • This implies that many of the smaller, ineffective players have been weeded out leaving the bigger players who have much larger marketing budgets.
  • Consequently MWC has revealed an industry that looks very mature (just like it did in 2005) but this time I can’t see anything on the horizon to upset the status quo.
  • I continue to prefer the ecosystems over the handset and PC makers in general as they, at least, have a way to differentiate

MWC Day 0 – Prominent feature.

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A feature phone steals the show.

Huawei – Rear view mirror.

  • Huawei launched its latest flagship the P10 and P10 plus but did not seem to be very excited about its products in a press conference that felt like it was simply going through the motions.
  • This was exemplified by the fact that Huawei had Pantone on stage talking for 15 minutes about two of the multiple colour variants in which the P10 is being launched.
  • Elsewhere, Huawei made incremental improvements to the camera and photography experience as well as marginal tweaks to the user experience.
  • At its heart, just like every other Android phones in developed markets, the P10 is a Google device and where Huawei is able to drive further usage, it will be Google that really benefits.
  • This is because, Huawei’s products remain largely undifferentiated to the user meaning that Huawei cannot charge a premium.
  • Huawei has made good progress with its brand this year rising to No. 72 (Interbrand) but even Samsung at No. 7 only really makes money from its volume, not premium prices.
  • Consequently, Huawei must find something with which to excite users otherwise it will continue to grind out 2-4% operating margins in the best instance.
  • Huawei has made good share gains but barely enough to be seen only as a dot in Samsung’s review mirror.

Nokia – No downside to old glory.

  • Nokia relaunched itself into the handset market with a throwback to its old glory days but the key ingredient, profit, looks unlikely to make a reappearance.
  • Global HMD, a company backed by Foxconn, launched three Android devices and new version of the classic 3310.
  • The 3310 has three features of note:
    • First: the battery lasts a month
    • Second: it has the Snake game
    • Third: it has the old Nokia ringtone.
  • Beyond that it is a design classic and while not sexy, it is likely to appeal in Africa and India where nearly 100m feature phones still sell each quarter.
  • Global HMD also launched the Nokia 3,5 and 7, which are three unremarkable Android devices that are really going to struggle to compete against the Chinese brands.
  • The real clue to the situation at Nokia and HMD Global is in the prices being charged for these new devices.
  • The 3310 is starting at $51 which in Nokia’s heyday would have been priced at almost half that and Nokia still would have made great margins on it.
  • The Android devices are priced at $150, $200 and $315 which in my opinion do not stack up that well against what the Chinese are offering.
  • This is clearly because Nokia no longer has the power of 40% global market share or its brand.
  • Consequently, if it wants to make headway in Android, it will have to do something interesting with the devices or cut its prices.
  • Good news for Nokia (the company) is that its exposure to this is simply the brand licence fee that it receives upon which gross margins will be almost 100%.
  • Consequently, there is no downside for Nokia if this does not work out as planned.

Samsung – Comes in the box.

  • Samsung launched a series of devices that I think need to have the accessories included in the box to drive user interest high enough to make a purchase.
  • Following a pitch on the needs of 5G and the launch of some infrastructure, came 2 tablets of which innovation around the new S Pen was the most interesting.
    • First: the Samsung Galaxy Tab S3 which was an unremarkable Android Tablet other than it has four speakers and that the S Pen comes in the box.
    • Second: the Galaxy Book which is a Windows 10 Pro tablet that is very thin but in my opinion is far from cutting edge.
    • At the cutting edge, I find the Eve V which is 7th generation i7 and is remarkable in that the device is fan-less.
    • The Eve V is a little thicker at 8.9mm but it delivers a more powerful processor, double the RAM, double the storage, more USB ports and a kickstand.
    • To jazz the Galaxy Book up Samsung is including both the S Pen and the type cover in the box with the device.
  • The S Pen stole the show in my opinion as it works with both Android and Windows Tablets, is integrated with Photoshop and Staedtler is doing a version of the S Pen that looks just like its classic yellow and black pencil.
  • Finally, a new version of the Gear VR was launched in conjunction with a hand controller that, of course, also comes in the box.
  • Of software, services, artificial intelligence and ecosystem there was no real mention other than a nod to Samsung’s cross device strategy powered by Samsung Flow.
  • The net result is that with the launch of the Galaxy s8 now on March 29th, these launches are unlikely to have any real financial impact this year even with the accessories already in the box.

Take Home Message

  • The launch of the new Nokia 3310 was the highlight of my day which is an indicator of how difficult it has become to innovate in smartphones.
  • Industry profits are gobbled up by Apple, Google, Baidu, Tencent and Alibaba leaving those without an ecosystem struggling for relevance.
  • Add this to a market that is unlikely to grow much in unit terms and may decline in monetary terms leads to a pretty grim outlook all round.
  • This is why I continue to prefer the ecosystems of whom Tencent, Baidu and Microsoft are my top choices.

Research Publication – Reality Bytes – Its master’s voice

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February 23rd 2016:  Radio Free Mobile launches a new product category looking at shorter topics relevant to the ecosystem. Issue No.1 deals with the usage of voice in digital ecosystems.

RFM research subscribers will receive their copy directly by email. 

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Voice is where much excitement and hype is to be found. Every ecosystem is developing a voice controlled digital assistant with which it hopes to enrich Digital Life and control the homes of its users. However, RFM finds that voice suffers from significant limitations meaning that the user experience and functionality that it can offer is way behind that that can be achieved using a visual device. This combined with the fact that the intelligence of voice based systems remains rudimentary at best means that voice is unlikely to replace screens any time soon.

  • Three stages of understanding. RFM defines three stages in a machine’s development to be able to understand voice commands. These are: 1) High word accuracy, 2) understanding of the request in multiple word orders and formats and 3) understanding of context and circumstance. RFM thinks that it is not until machine understanding reaches stage 3 that voice can have any hope of challenging the established man machine interfaces of screen, touch, keyboard, haptics and mouse.
  • Defining voice. Despite these limitations, voice usage in ecosystems is growing very rapidly. RFM research indicates that voice usage is really growing only as an alternative to typing a request rather than as a rich two-way voice interaction with the ecosystem. Hence it is important to separate the two types of voice usage to understand voice’s place in the Digital Lives of users. RFM has termed these as one-way voice and two-way voice.
  • One-way voice is where voice is used as an alternative to using a keyboard. Most ecosystems have reached stage 1 making this use case viable. While, input is voice based, the response is delivered through the usual visual method. RFM thinks that the vast majority of voice requests in digital ecosystems use this method which will have no effect on the monetisation methods currently used by Google, Facebook etc.
  • Two-way voice is where voice is used as both input and output. It remains almost exclusively the realm of home speakers such as Amazon Echo and Google Home. RFM finds that the rudimentary AI of digital assistants combined with the limited amount of information that voice can convey, often has these systems falling back on displaying results on a screen.
  • Voice in ecosystems. Digital assistants and voice based interfaces are driven entirely by the artificial intelligence that powers them. Although the search engines are leading the development of AI, all systems are far too rudimentary to replace visual based devices for the foreseeable future. Facebook is still the laggard when it comes to advances being made in AI.

India e-commerce – Unicorns and Donkeys Pt. V.

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Flipkart likely to buy Snapdeal. 

  • The latest in a series of woes that has hit the Indian e-commerce market reinforces my view that in network based businesses, there really is only space for one player to do well.
  • This time around it is Snapdeal which is cutting costs by laying of 800 people, cutting the salaries of its founders to zero and exploring the sale of its mobile wallet FreeCharge at a big discount to what it paid for it in 2015 ($400m).
  • The founders of Snapdeal admit to spreading themselves too thin and not executing optimally, but I think that the real issue here is much more fundamental.
  • Snapdeal and Flipkart like Alibaba and to a lesser degree Amazon are market places which bring together merchants and buyers in one easy to use location and from which they can take a small cut.
  • In effect, they are network businesses just like Uber, Alibaba, AirBnB, Craigslist and so on and consequently, they are bound by the same rules.
  • 18 months ago I proposed a rule of thumb that states: A company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making profit (see here).
  • This, in a nutshell, is the problem faced by both Flipkart and Snapdeal in India.
  • Flipkart is bigger than Snapdeal and so it is in a slightly better position but it is not double the size of its nearest rival.
  • Furthermore, both have to contend with Amazon which is determined not to make the same mess of India that it made in China when it went up against Alibaba and lost.
  • Amazon is not the largest in India, but it has the backing of the mothership meaning that it can lose money for far longer than either of the other two.
  • Flipkart has the best chance of reaching this hallowed status as it is the largest in India with around 35% of monthly active users but it will need to reach at least 50% before it is double the size of Amazon (7Park Data).
  • This is why I think it could end up acquiring Snapdeal, because adding Snapdeal’s users to its own would get it pretty close to achieving that milestone.
  • Without this combination, we are likely to be left with 2 unprofitable donkeys that are slowly ground out of existence by the vastly more powerful foreign player.
  • This uncertainty keeps me from recommending investments in either of the Indian e-commerce companies even at the discounts now being offered but if I had to go for one, it would be Flipkart.

Yahoo & Verizon – Final execution.

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Finally, Yahoo executes.

  • Yahoo may have badly failed to create any value for investors in mobile, but its execution on the sale of its core business is finally generating significant value for its long-suffering shareholders.
  • Verizon will now pay $4.48bn to acquire the core business of Yahoo a reduction of 7% of $350m and the two companies will share any legal and regulatory liabilities that arise from the two massive data breaches that Yahoo has suffered.
  • I think that this is a triumph for Yahoo which is capitalising on Verizon’s apparent desperation to build a digital ecosystem.
  • For the last 10 years Yahoo has neglected its Internet assets but it has still managed to enjoy high usage and engagement in the fixed Internet despite its failure in mobile.
  • It is this engagement that Verizon is paying $4.48bn for.
  • However, recent events have given users the perfect excuse to finally close their Yahoo email account and move to something else.
  • I have long believed that Yahoo Mail is the service that generates most of the usage and should users leave Yahoo, then the value that Verizon is attributing to Yahoo will have to be written off.
  • Top of the list of Yahoo’s many misfortunes are two massive hacks, one of which took Yahoo 4 years to detect.
  • Over the last 12 months, Yahoo has admitted that around 1.5bn user accounts have been compromised in two very large break ins.
  • This is more accounts than Yahoo actually has, implying that every account that Yahoo has been compromised with a good number of its users having suffered the indignity twice.
  • If this was not enough, Yahoo’s Q4 results showed improving margins solely due to cost cuts which deflected attention away from the fact that revenues are still falling, albeit more slowly than before.
  • On top of Yahoo, Verizon already owns AOL and is trying to rebuild its Go90 mobile video service using the team and assets acquired from Vessel in 2016.
  • The problem I have with Verizon’s strategy is that it is late to game meaning that it has ending up acquiring all of the assets that no one else wanted.
  • Furthermore, Yahoo and AOL have both badly failed to generate any traction on mobile but somehow Verizon seems to think that putting all of these together will create a thriving ecosystem.
  • This is of course possible, but if Yahoo was unable to hold onto the talent capable of executing this dream, I think that Verizon has very little chance.
  • Consequently, instead of a thriving ecosystem, I see a bunch of disparate assets from which users are likely to drift away from at the first opportunity.
  • The real winner here is Yahoo which is receiving far more value for this asset than I think that it is worth and has also managed to halve its exposure to liabilities that I think it should be fully on the hook for.
  • Combine this value with the continued strong performance of Alibaba and Yahoo Japan, and it is not difficult to still see upside in the Yahoo share price.
  • Marissa Mayer may have been terrible at executing on a digital ecosystem but she seems to be a great salesperson.

Samsung – Residual fall-out.

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It is still the long-term damage that I fear. 

  • While Samsung appears to have contained the disaster that was the Note 7, I remain concerned that the reputational damage could have an impact in market share in developed markets and especially at the high-end.
  • Samsung has taken a massive $5.4bn hit to profits, apologized profusely for the recall and admitted shortcomings in its quality and assurance process but I don’t think that the full effects of this issue have fully hit home.
  • This is because there is also the potential for market share and pricing pressure to materialise from the weakening of its brand and its reputation as a vendor of high quality consumer electronics.
  • The first sign of this is in with a survey from Harris Poll which shows that Samsung reputation has fallen from No 7 in USA to No. 42, just one position above the US Postal Service.
  • Apple and Google have remained pretty steady at no. 5 and 8 respectively but Samsung is now thought to be less reputable than Hewlett-Packard, GE and Sony, which are competitors that do date, Samsung has had no trouble in defeating.
  • What concerns me is that when the Galaxy s8 and s8 edge are available, users in developed markets are likely to think a little bit harder before purchasing and may go so far as to consider something from LG, Google, Sony or Huawei.
  • Hence, I think that Samsung will have to price the Galaxy s8 and s8 edge quite carefully as well as go on a major charm offensive to calm user fears that these products will suddenly burst into flames.
  • I am certain that these products will be the safest that Samsung has ever made but that is not how the mindset of the average smartphone buyer operates.
  • Both of these charm offensives will cost money in terms of pricing and marketing spend.
  • The high-end devices that Samsung makes generate the majority of its handset profits and I am somewhat concerned that profits could suffer as the aftershocks of this disaster make themselves felt.
  • This is why I have been cautious on Samsung since the problem with the Note 7 surfaced, and why I would be thinking of taking some profits following the recent excellent performance in the share price.

Alibaba – Five guns east

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Alibaba is going guns blazing for offline. 

  • Alibaba appears to be moving into offline retail much more quickly than I had anticipated as it is complimenting its $2.6bn bid for Intime Retail Group with a partnership with Shanghai Bailian Group which owns 4,700 stores in 200 cities in China.
  • This is a huge step forward from its bid to acquire Intime retail group which operates 29 department stores and 17 malls predominantly in the eastern province of Zhejiang where Alibaba’s home town of Hangzhou is to be found.
  • The idea of this partnership is to bring Alibaba much further into the physical world where $4.5tn of sales are still transacted every year as well as improve the offline experience that users have in Bailian stores.
  • Chinese retail is a fragmented and frustrating experience where decent service and information with regards to inventory, product lines and so on is routinely not available.
  • Consequently, when an online offering appears where this information is clear and one is able to easily purchase goods and know when they will be delivered, shoppers quickly adapt.
  • It is the terrible offline experience with regards to almost everything that has allowed so many other goods, services and activities in China to rapidly migrate from offline to mobile.
  • It these problems that Bailian hopes to fix via its partnership with Alibaba which will provide its technology, its understanding of logistics and its processing systems to modernise Bailian.
  • In return Alibaba will get a large physical presence, access to shopper data and the first big launch for Alipay into the physical world.
  • There are two large mobile payment systems in China.
  • One is Alipay which utterly dominates B2C e-commerce and the other is WeChat Pay which dominates peer to peer as well as payments to shops, restaurants and service providers.
  • This move will bring Alipay into direct competition with WeChat Pay for the first time.
  • I think this partnership will be similar to the potential deal with Intime but on a much larger scale.
  • I have previously viewed (see here) the potential deal with Intime as an experiment in retail which would then be rolled out more widely once it had been proven to work but it looks like Alibaba is going national regardless.
  • Fortunately, as this is a partnership, there will not be much downside risk if it goes wrong which leads me to believe that for Alibaba, this is really about data and pushing Alipay into a new domain.
  • If Alibaba can have a deeper understanding of, and relationship with Chinese shoppers then it will be able to more accurately predict their shopping patterns resulting in better purchasing rates and the ability to charge a higher percentage of GMV to its merchants.
  • This will translate into better revenue and profit growth as was the case in 2016 where increasing monetisation underpinned a large part of the company’s outperformance.
  • I think this expansion will be much slower in 2017, and so I remain cautious on Alibaba preferring Tencent or Baidu in China.

Google vs. Amazon – Homefront.

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This could be a repeat of VHS vs. Betamax. 

  • Google is adding functionality to allow Google Assistant to compete more directly with Amazon’s Alexa, but what it really needs is to offer love and support to developers of smart home products.
  • Google’s failure to do this was visible on every stand at CES where a smart home product was to be found as they all will work with Amazon Alexa
  • Only a very tiny fraction will work with Google Assistant.
  • Google’s shopping functionality has involved singing a up a series of retailers such as Costco, PetSmart and Target to link their online ordering systems with Google Home such that a similar (to Amazon) shopping experience can be offered through the device.
  • Measuring up to Amazon in this category is going to be tough because Amazon has one system through which millions of products are available globally, whereas Google will have to sign up lots of retailers in every locality where it aims to have this service available.
  • However, when it comes to almost all of the other features, Google Assistant is capable of offering a vastly superior user performance than Amazon Alexa.
  • This is because the AI that powers Google Assistant is top of the class while Alexa’s is second rate at best.
  • Furthermore, the Google Home speaker is $50 cheaper than the Amazon Echo and in my opinion, a nicer looking product.
  • However, where Google falls over is home automation and here Amazon is currently ruling the roost.
  • RFM research has found that device developers receive plenty of love and support from Amazon which combined with the fact that there are now 8m devices in the hands of users drives them to make their products work with Alexa right from launch.
  • This is despite the fact that using many of these products with Amazon Alexa is a frustrating and fragmented experience.
  • A good example of this is Plex, which recently enabled an Alexa skill so that the user could control the Plex player using Alexa.
  • However, because Alexa lacks the brains to make service intuitive, the user experience is so bad that one tries to control Plex with Alexa once and quickly returns to the remote control.
  • In contrast to Amazon, many developers find that Google is difficult to work with and some did not even know who to at Google to call to enable Google Home with their product.
  • This is the opportunity for Google Home even though it only has around 0.5m devices in the market today.
  • I think Google needs to ramp up its love and support for developers immediately and thinking that they will just turn up at Google i/o is not nearly good enough.
  • There is a whole segment (home) of the digital ecosystem up for grabs right now and I still maintain that this is Google’s to lose.
  • However, at the moment it is Amazon that is blazing the trail and if Alexa makes it into the majority of households before Google pulls its finger out then the game will, in all probability, already be lost.
  • This will not be the first time that an inferior product will have won the day and I think there are valuable lessons that Google can learn from studying this history.
  • From an investment perspective, I continue to not really like either Alphabet or Amazon preferring Baidu, Tencent and Microsoft.

Huawei & Baidu – Bodies and time.

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I think Huawei would be better off doing a deal with Baidu.  

  • It looks like Huawei has decided to build its own Chinese language digital assistant to cement its recent gains at home but no matter how many bodies it throws at this task, its lack of the core raw materials (data and history) is going to cause problems.
  • The digital assistant is the first real Digital Life service that is entirely dependent on artificial intelligence for its functionality which creates a huge challenge.
  • Furthermore, in order to evolve, all digital assistants need to generate usage data which can then be used to improve the algorithms that power the user experience.
  • Even the best assistants out there today are hugely limited in terms of what they can understand and what they can achieve.
  • For example, to accurately answer questions around exchange rates, the assistant has to be taught what these are, how they work and in what form the questions are likely to be asked.
  • For example, asking Amazon Alexa how many US Dollars there are to the GB Pound provides the correct answer but ask for UAE Dirhams to the Pound or Dollar and Alexa falls silent.
  • Only Google Assistant was able to provide the right answer due to the combination of the best search system and the best AI available.
  • In effect RFM research has found that Alexa, Cortana and Siri have been programmed with a fairly narrow set of capabilities and the AI and data set is simply not there to support the service when something unexpected is requested.
  • Fortunately for Huawei, Google is not present in China but at home it will be facing an opponent that is almost as good: Baidu.
  • Baidu dominates the search market in China and has been working on its AI algorithms for nearly 20 years.
  • Furthermore, Baidu has already launched its own digital assistant called Duer which I suspect will be significantly better than anything that Huawei is likely to produce in the medium term.
  • However in China, none of the ecosystems are preinstalled devices meaning that Baidu will be unable to install Duer on the device and set it as default.
  • RFM research (see here) has found that this could confer a substantial advantage to any ecosystem as strategy is virtually absent in the Chinese market outside of the app stores.
  • Huawei as a handset maker will have this advantage and so I can see a scenario where users try its digital assistant but unless it is superb they will quickly switch to Duer.
  • This is where I think Huawei will have difficulties as even though it has 100 engineers working on this product, it is starting from scratch and building decent AI takes years and requires vast quantities of data.
  • Hence, I think it unlikely that Huawei will ever come up with a product as good as Baidu’s.
  • This is where I think Huawei and Baidu could help each other as Baidu has the product and Huawei a mechanism for distributing it.
  • A deal where Huawei installs Duer at the factory and sets it by default in return for being paid TAC (traffic acquisition cost) makes more sense to me than paying 100 engineers to come up with an inferior product.
  • This will not help Huawei’s ambitions to develop an ecosystem and generate better profitability, but TAC revenue from Baidu would certainly help improve margins.
  • Given its recent market share gains at home, the time to negotiate this deal is now rather than when its own assistant has tried and failed.
  • Although Baidu looks like it may be backing out of its ecosystem, the short-term improvement in its financials that cost cuts could generate could give the shares a lift (see here).
  • This is why it is still on my preferred list along with Tencent and Microsoft.

Facebook – Brainless video.

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Focusing on video first makes complete sense.

  • I think that Facebook is making the right choice in targeting video first as it already has traction and video-based services tend to have the lowest requirements for artificial intelligence to make them easy, fun and useful.
  • With the launch of a TV app being just the latest move Facebook has made in video, it is increasingly clear that Media Consumption is Facebook’s number 1 priority for 2017.
  • The TV app that is being launched is very simple in that it makes it easy for a user that does not have time to watch videos on Facebook during the day to easily to so at night on a larger screen.
  • This should enable a better video experience and begin to spread engagement across other devices but it will come with the added complication of multiple resolutions and bit rates.
  • On a mobile device the screen is small which means that lower resolution videos and bit rates are acceptable, but once these are played on a larger screen, their shortcomings quickly become obvious.
  • This move into TV comes hot on the heels of the addition of a tab at the bottom of the Facebook app which links to the top trending videos as well as videos that Facebook thinks that the user might like.
  • The TV app will initially be available on Amazon TV and Apple TV but I expect that it will quickly spread to Xbox, PlayStation and the other streaming TV devices that are available.
  • The one place I don’t expect to find it is Chromecast as Facebook’s video aspirations are clearly a challenge to YouTube.
  • Of the three new areas of Digital Life (Gaming, Media Consumption and Search) that I see Facebook targeting (see here), going for video first makes complete sense.
  • This is because Facebook already has a lot of traction in this space and also because it is the least demanding in terms of requiring intelligent automation.
  • The total number of video items that are present is very low compared to other things like music or searches and knowing who posted the video is a good indicator of its content and who will like it.
  • I continue to see Facebook as the laggard in AI (see here) and targeting video is sensible as it gives it more time to improve its AI before having to apply it to more difficult tasks.
  • Furthermore, the fact that video is a fast growing, but likely soon to mature, medium for digital advertising also means that the time to really address it is now.
  • I see the app on the TV as just the beginning and would not be surprised to see this being followed up with premium content taking it into the realm of Netflix, Hulu, YouTube and Amazon Prime.
  • That being said, I don’t think that Facebook’s offering in Media Consumption is anything like mature and so I think it will be some time yet before it becomes a real destination like YouTube.
  • Consequently, I still see a slow period of revenue expansion while its new strategies mature before revenues take off again.
  • As this reality sinks in, I think the valuation could unwind somewhat providing a better opportunity than now to invest for the long-term.